EU banks watchdog says bad loan rule to have moderate capital hit

LONDON (Reuters) - European Union proposals that would force banks to set aside more capital to stop the build up of bad loans will only have a modest impact on capital requirements and should eventually boost profits, the bloc’s banking watchdog said on Wednesday.

FILE PHOTO - Euro banknotes and coins are displayed in a shop in Brussels, Belgium November 14, 2017. REUTERS/Eric Vidal

The European Banking Authority (EBA) published an opinion that endorsed EU plans for a “prudential backstop” to prevent under provisioning from damaging a bank’s solvency.

The plans are due to be published by the European Commission later on Wednesday.

The backstop would apply to loans granted from the date the new rules come into force, a draft of the proposals seen by Reuters on Tuesday showed.

So-called non-performing loans have weighed down banks in countries like Italy, leaving them still struggling in some cases a decade after the financial crisis began.

The new rule would only tackle provisioning for new loans and not the mountain of legacy bad loans.

“As part of the process of repairing the EU banking sector, the EBA has pushed for speedy recognition, and resolution of asset quality issues in the EU,” the watchdog said in a statement.

A compulsory deduction from a bank’s capital buffer to cover new loans can help incentivise banks to address bad loans proactively, EBA said.

Banks have said they are already holding far more capital than they did before the 2007-09 financial crisis when taxpayers had to bail out many lenders.

But EBA said the cumulative impact of the new rule over a seven-year horizon, seen as the maximum amount of time for banks to adjust to it, would amount to 56 basis points or 10 percent of retained earnings after dividends.

“Banks which already apply conservative provisioning practices would not experience any impact as a result of the proposed measures,” EBA added.

A global “IFRS9” accounting rule from this year requires banks to provision far earlier in case a loan goes bad, and the EBA said its calculations have taken this into account.

There is a high correlation between low bank profitability and relatively high amounts of bad loans on the books, EBA said.

“This may support the conclusion that a decrease in the overall level of NPLs, as a result of this policy decision and other actions taken in parallel... will in general contribute to the profitability of banks,” EBA said.